UK households are risking a personal debt crisis by switching credit cards instead of paying off balances, a leading credit ratings agency has warned.
With consumer spending now higher than before the credit crunch, the emergence of challenger banks and the deals they offer to entice customers away from the Big Four lenders are starting to store up problems that will emerge during the next crisis, Moody’s said.
The organisation’s report comes just a day after the Bank of England told households to start “managing their finances” in expectation of interest rates rising.
Rates have been held at their record low of 0.5pc for the past six years, which has had a knock-on effect of making borrowing cheaper for consumers. Official data on Tuesday also showed inflation fell to zero in June, making many goods cheaper to buy.
However, the rush to take on debt to maintain lifestyles in a low wage growth environment has worried analysts.
“Consumer spending has surpassed pre-crisis levels, at a time when growth in unsecured consumer debt is outstripping wage growth,” Greg O’Reilly, an analyst at Moody’s, said.
“Low interest rates are hiding the risk to consumers, making consumer debt appear more affordable on the surface, but masking potentially negative long-term consequences.”
The agency’s latest report – Rising Consumer Debt Is Increasing Risk in UK Credit Card Pools – found that unsecured lending has jumped 7pc since December 2012.
This has coincided with a period in which challenger banks’ card balance growth rates have overtaken those of high street banks such as Lloyds, Barclays and HSBC.
Challenger banks are increasingly offering more competitive deals to entice customers to sign up to their products.
Moody’s found that at the beginning of 2013, the best balance transfer offers provided a two-year interest-free period, whereas the current best offers allow for three years of interest-free credit.
However, instead of using this interest-free period to pay down their debt, households are seeing it as a positive move and spending more on credit cards.
“The risk is that if consumers do not repay the transferred balances before the end of the interest-free period and the debts begin to accrue interest, consumers will struggle to afford the higher levels of debt they have taken out since 2013,” Moody’s said.
“This ‘affordability risk’ now appears a likelier scenario than it did previously.”
Despite this, Moody’s expects the number of card holders missing payments will remain stable this year as unemployment has fallen.
Wage growth dropped sharply during the financial crisis, leading people to turn to credit cards, but new figures from the Office for National Statistics showed total pay, including bonuses, grew by 3.2pc in the three months to May, compared with a year earlier.
However, economic risks remain. Nigel Green, the founder and chief executive of financial adviser deVere Group, which has $10bn under advice, warned of trouble ahead.
“There appears to be increasing speculation among market analysts that a market downturn should be expected,” he said.
“They say this could possibly be triggered by the events of recent weeks, including more than $3 trillion being wiped off China’s stock market over the past month, the Greek debt crisis reaching giddying heights, and the US Federal Reserve being likely to raise interest rates this year.”